Criticising corporate governance practices and whipping independent directors is a good way for a new chairman of the Securities and Exchange Board of India (SEBI) to start his term. There is usually plenty of fodder for such criticism; it makes the SEBI chairman appear tough and uncompromising, and puts India’s most powerful businesses on the back-foot.
So, Ajay Tyagi, in one of his first public engagements as SEBI chairman, lashed out at poor governance standards of Indian listed companies at a meeting of the Confederation of Indian Industry (CII). Media reports quote him as saying that independent directors are appointed “at the mercy of promoters,” with no prescribed qualifications or procedures. SEBI’s brand new website has not uploaded any speech by senior officials after
24 December 2016; so one can only rely on media reports.
Mr Tyagi also referred to boards as closed clubs where promoters appoint ‘friends’ as directors in order to comply with listing requirements. He also found it ‘odd’ that, often, independent directors ‘conveniently resign’ without giving proper reasons or provide fake reasons for their exit. CII appears to have accepted this tongue-lashing without a murmur.
But, frankly, Mr Tyagi is in no position to get away with such generalisations on corporate governance. Two of India’s most shining business houses have seen their reputations for good governance and corporate ethics blow up in the past year, while SEBI sat and watched. One is the Tata group, where Ratan Tata and his hand-picked directors of Tata Sons, the holding company, sacked chairman Cyrus Mistry ignominiously, without assigning any cogent reason and pressured him to quit from all listed companies where he was a director. Simultaneously, marquee names among independent directors were pushed out of the boards of Tata companies, merely because they performed their duty by shareholders and exerted their independence. Among those who stood up to Mr Tata was Nusli Wadia, who was ejected from all Tata company boards. Analjit Singh (of the Max group) walked out of the Tata Beverages Board, immediately after a rather dubiously conducted board meeting, and Keki Dadiseth, former chairman of Hindustan Unilever, has recently quit the Indian Hotels’ board. We may see some more exits as various directors’ terms come up for renewal.
Corporate India and public shareholders expected some action from SEBI; they expected the SEBI chairman to lead from the front and respond to some critical issues about the accountability of independent directors raised by Mr Wadia, one of India’s leading industrialists. Mr Wadia had said, “What is at stake is not whether I am removed or not, but the fate of the very institution of independent director that has been created in law and by SEBI to safeguard the interests of all stakeholders. If independent directors can be removed at the whim and fancy of a promoter, then their role will be reduced to that of ‘yes men’.”
He went on to say that the ability of a promoter to remove an independent director through the brute force of its shareholding, by an ordinary resolution on which it can vote, is a serious and major dichotomy and the contradiction needs to be, and must be, addressed, urgently. That was at the end of last year.
What was SEBI’s reaction? Silence. After the issue had all but blown over, UK Sinha, the then SEBI chairman, told a bunch of reporters in December 2016 that there were “no compelling reasons” to review the norms regulating board members. Mr Sinha did not even put up an appearance of concern by calling the key players, like Ratan Tata, Cyrus Mistry, Nusli Wadia or several stalwarts, such as Deepak Parekh or Keki Dadiseth, for a discussion.
SEBI still has nothing to say about the hatchet job done by another set of industrialists, academics and investors on behalf of Mr Tata. Instead, SEBI’s reaction was leaks to the media to say it was ‘watching’ the situation closely and has ‘sought responses’ from the group.
The second case is that of Infosys, where it is none other than NR Narayana Murthy (founder, former chairman of SEBI’s corporate governance committee and the person credited with building a culture of ethics and compliance at the software giant) who has made some serious charges against the incumbent management. No attempt was made to get first-hand feedback from NR Narayana Murthy or R Seshasayee (non-executive chairman of Infosys). No effort was made to verify Mr Murthy’s allegation that former CFO Rajiv Bansal’s super-fat exit package appeared to be ‘hush money’ to suppress some negative information.
The Infosys board’s astonishing failure to record minutes of that particular board meeting has not been questioned by SEBI, nor its subsequent decision to slash
Mr Bansal’s exit pay. In fact, Mr Bansal’s payout was originally reported as being Rs23.08 crore, which curiously dropped to Rs17.38 crore and has ostensibly been slashed to Rs5.2 crore. This, too, seems incorrect, because Mr Bansal is clearly not planning to give up on his contracted package and has started arbitration proceedings. It will also be safe to bet that he will get the amount that was promised to him, now that the board has appeased Mr Murthy by appointing his personal friend and nominee, Ravi Venkatesan, as co-chairman, along with Mr Seshasayee.
SEBI has not even questioned the curious practice of two non-executive heads at top companies—whether listed entities or quasi-regulatory bodies. As in the case of Infosys, SEBI is silent about the powerful National Stock Exchange (NSE) appointing a non-executive chairman and non-executive vice chairman.
The latter post was allowed to be created by this tightly regulated entity only to accommodate Ravi Narain who, clearly, wanted to continue enjoying the perks of the position without the responsibilities. In fact, Mr Narain merrily continues to be on key committees at the NSE after the algo scam (first exposed by Moneylife) showed how compromised its systems and management practices were. Mr Tyagi’s failure to ensure quick decisive action only helps the Exchange to remain unlisted indefinitely, much against public interest and the wishes of its fretting large institutional investors.
Earlier, SEBI chairmen used to complain about not having adequate powers to act against companies. All that changed during UK Sinha’s tenure. Today, SEBI is probably the most powerful market watchdog in the world in terms of its investigation and enforcement powers. A fact-finding exercise, led by the SEBI chairman, does not even require any special powers, but would have sent out a powerful message to corporate India. Instead, the market watchdog decided that it will neither bark nor bite.
Mr Tyagi has a big internal mess, left behind by his two immediate predecessors, to clean up. It is curious that he chose to start his innings by lashing out at corporate India for poor governance, while also admitting that he has ‘no solutions to offer’. If Mr Tyagi wants to experiment with ‘qualifications’ and ‘procedures’ for the appointment of independent directors, he should focus his energy on improving compliance and governance at listed public sector enterprises (PSEs) and public sector banks (PSBs).
It is no secret that independent directors of these entities are usually cronies of the ruling political formation or powerful bureaucrats. Many top PSEs are not even able to form audit and remuneration committees because the government has failed to appoint independent directors. As for PSBs, the massive bad loans that they have built up over the years are testimony to their dysfunctional boards and poor governance.
Having failed both, corporate India and investors of listed companies, by remaining silent during two of the biggest bust-ups on corporate governance, SEBI is really in no position to pontificate. Let’s hope the new chairman will not launch another meaningless exercise to add to the enormous red-tape, endless form-filling and disclosures that pass off as regulatory action in India.
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Thanks.